By Mike Paulenoff, MPTrader.com
The Monday morning action has been weak, as everyone knows, but the significance of the weakness is that this is follow-through from Friday's downside reversal spikes in the all the indices. In the past you've had weakness on a Friday that really has not shown much follow-through to the downside at all, but this past Friday was different, and you have some significant weakness this morning.
In the first hour or two of trading the indices continued their slides, and in particular you've seen the E-mini S&P break through important support around the 1042 area and continue lower. Right now it's at 1037 or so, and while it should go lower, my work suggests that it will stall here and try to get a rally going through that noontime grind period. The rally, though, in my estimation won't get past 1040-41, at which point the market will roll over again.
The surprise would be if you don't have a rally and just sit here near the lows and fall apart. The reason this is possible in particular in the E-mini S&P is because you have a head-and-shoulders top pattern that was triggered this morning. It's a three-week pattern. The neckline -- support level -- of the pattern was broken at around 1042, and the first target is 1028, and we're at 1037 now. So things could get pretty nasty without getting much of a rally.
However, since we're relatively oversold the odds do favor some sort of sideways to upside grind ahead of the rollover that at some point -- probably in the next day or so --will get you to 1028, perhaps even to our lower target at 1020-1018.
As far as the E-mini Nasdaq goes, you have a similar pattern, although it wasn't so clear-cut as a head-and-shoulders. Nonetheless, it did break key support at around 1400. Right now it's trading at 1387. Key support is 1385-83. If it cannot rally back to around 1395-98 during the noontime grind and continues lower, it would not be surprising to see 1360 a little later this afternoon and/or into the next two days.
As for the QQQs, they also broke key support at 34.85, which was a weak ago Tuesday's pivot low (the pivot low that took the market up to 36.10 around the time Applied Materials came out with its earnings). A break of 34.85 has triggered some downside follow-through into the 34.50 area. 34.50 is a very important level because the sharply rising 50-day group of moving averages is positioned rising sharply through the 34.50 area. Usually the first time down testing a sharply rising 8-month moving average usually does not break down before you get some sort of recovery rally.
So in the Qs, I would not be surprised to see a rally from 34.45-.50 into the 34.90 area before it rolls over and heads towards our next downside target of 34.20.